Accredited Investor News » SEChttp://accreditedinvestornews.com Your Alternative Investment CommunitySun, 18 Mar 2018 12:12:00 +0000en-UShourly1How to use Regulation A+ to raise up to $50 million capitalhttp://accreditedinvestornews.com/how-to-use-regulation-a-to-raise-up-to-50-million-capital-by-david-drake/ http://accreditedinvestornews.com/how-to-use-regulation-a-to-raise-up-to-50-million-capital-by-david-drake/#commentsWed, 08 Mar 2017 16:26:32 +0000http://accreditedinvestornews.com/?p=16427When the Securities and Exchange Commission (SEC) approved the changes to Regulation A, it has generated lots of debate and discussion. The new rules on Regulation A+ took effect last June 19th. The rules are expected to create a new category of quasi-IPO. This will enable companies to raise money from the public at less expense ...

When the Securities and Exchange Commission (SEC) approved the changes to Regulation A, it has generated lots of debate and discussion. The new rules on Regulation A+ took effect last June 19th.

The rules are expected to create a new category of quasi-IPO. This will enable companies to raise money from the public at less expense compared to a regular IPO.There are however some important points to keep in mind.

The old Regulation A had such low limits for fundraising as well as high compliance costs that it was rarely used. The limit was only $5 million, and companies had to file offerings in every state in which they were selling the securities.

The new Regulation A+ creates two categories namely, $20 million for the existing Tier 1, and a new Tier 2 – raising up to $50 million, of which $15 million can be offered to existing shareholders. Tier 2 offerings will not require company review by every state, and this will considerably reduce the cost of compliance.

Startup company in their early stage. | PIXABAY.COM

The opportunities created by the new regulations are not going to work for every company. It will be appropriate solutions only for certain companies looking for an intermediate step between venture capital and going public.

This may not be the best funding option for startup companies in their early stages. Regulation A+ imposes certain filing, reporting, and preparation requirements though nowhere near as stringent as real IPOs.

These requirements are definitely well beyond the information that potential venture capital or angel investors would require. For many startup companies, this can be too expensive or time-consuming to be realistically undertaken.

Regulation A+ in comparison to a Reg D offering | PIXABAY.COM

Clearly, these offerings are going to take their toll both on time and money. Though the disclosure requirements are not as stringent as requirements for IPO, they are still quite significant.

It is expected that the time taken for SEC review from start to finish could well run into several months. The costs of preparing and submitting audited financial statements for small and medium enterprises could be between $5,000 to $75,000 and legal fees will have to be incurred on top of the other costs.

It would be fair to estimate the total cost of a Regulation A+ offering will come to high five figures or low six figures though this will still be modest compared to IPOs costs which could well be in excess of $1 million according to data from PwC.

Clearly, there are benefits from Regulation A+ offerings which could make it a preferable option for some companies. The company can publicly advertise their offerings and raise money from both accredited and non-accredited investors.

The securities are unrestricted meaning that they can be resold. Many companies can take the opportunity to create liquidity through small secondary markets created on alternative platforms.

This will also give them an opportunity to gauge the appeal to large institutional investors. These benefits mean that it will be worth the time and cost for some companies to put together these offerings.

Benefits from Reg A+ offerings | PIXABAY.COM

The new Regulation A+ creates two categories namely, $20 million for the existing Tier 1, and a new Tier 2 – raising up to $50 million, of which $15 million can be offered to existing shareholders. Tier 2 offerings will not require company review by every state, and this will considerably reduce the cost of compliance.

]]>http://accreditedinvestornews.com/how-to-use-regulation-a-to-raise-up-to-50-million-capital-by-david-drake/feed/0Will New Guidelines Bolster Family Offices? Or Become Their Kryptonite?http://accreditedinvestornews.com/will-new-guidelines-bolster-family-offices-or-become-their-kryptonite-by-david-drake/ http://accreditedinvestornews.com/will-new-guidelines-bolster-family-offices-or-become-their-kryptonite-by-david-drake/#commentsThu, 19 Jan 2017 06:27:51 +0000http://accreditedinvestornews.com/?p=16247By David Drake In the past few years, several changes have been made in the family office regulatory environment. Family offices that were not registered with the US Securities and Exchange Commission (SEC) in 2011 had to reassess their acquiescence with the latter’s regulations, which restricted family offices qualifying for exemption of the Registered Investment ...

In the past few years, several changes have been made in the family office regulatory environment. Family offices that were not registered with the US Securities and Exchange Commission (SEC) in 2011 had to reassess their acquiescence with the latter’s regulations, which restricted family offices qualifying for exemption of the Registered Investment Advisors. The Final Rule 275.202 (a)(11)(G)-1, that came to effect on 22 June 2011, outlined the family offices excused from registration requirements contained in the Investment Advisers Act of 1940, and amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act -“Dodd-Frank Act” in July of 2010.

As Registered Investment Advisers, family offices are subject to SEC’s oversight, and are expected to observe SEC’s regulations and reporting requirements with regard to annual disclosures, compliance programs, record keeping, solicitation agreements, plus marketing and advertising. “This is important because investors are looking for a well-grounded, long-term commitment, and compliance to regulations is part of the grounding process,” says Bruce H. Lipnick, Asset Alliance’s Founder and CEO. Even so, the Investment Advisers Act of 1940 exempts private advisers serving less than 15 clients that neither conduct themselves as investment advisers in public nor advise Registered Investment Companies. At the moment, many family offices do, in fact, qualify and depend on the exemption for private advisers to evade SEC’s oversight and registration.

Investors are looking for a well-grounded long-term commitment

These exemptions include all Single Family Offices (SFOs), and some Multi-Family Offices (MFOs), serving less than 15 wealthy families or individuals. However, there are rules that guide the client counting process. For instance, a US-based adviser is required to include investors of all nationalities, while a non-US adviser only needs to take into account clients who are US residents. Related individuals sharing the same residence are counted as one client, and legal entities such as corporations, trusts, and limited liability companies are counted as single clients as well.

Family Office Regulations

Apart from the SEC, there are other regulations that guide the operations of family offices. These are:

The Dodd-Frank Exemption Regulation

Most family offices have to exclude distant relatives and friends from trusts in order to qualify for exemption

The Dodd-Frank Act of 2010 sets the platform for SEC to control investment funds, collective vehicles and advisers. Based on this Act, the regulation of SFOs as investment advisers is exempted upon satisfying SEC’s exemption criteria. To qualify for exemption, a family office has to provide advisory services to family clients only, and be fully owned and controlled by family entities or members. Moreover, the family office should not present itself as an investment adviser to the public. The exemption process is quite complex. For example, most family offices have to exclude distant relatives and friends from trusts, in addition to collective investment vehicles, in order to qualify for exemption. These rules may apply to foreign families if they have family members residing, or owning property, in the US.

The Tax Disclosure Regulation

The US Foreign Account Tax Compliance Act (FATCA) provides detailed tax, withholding tax and reporting requirements with respect to payments of specific incomes to financial entities or institutions abroad from US sources. Due to these regulations, non-US families may find their financial accounts, in which they have vested interests, subjected to US reporting requirements. In the event that one of the family members pays tax in the US, she or he has complete interest in that account as well.

Anti-Money Laundering Regulations

Investment funds and banks, are reaching out for details regarding ownership of investor entities and accounts.

With the ever rising anti-money laundering rules and ‘know your client’ requirements, financial institutions, such as investment funds and banks, are reaching out for details regarding ownership of investor entities and accounts. The focus of the Foreign Account Tax Compliance Act is on reporting accounts where US taxpayers have considerable interest. This opened an avenue for the government to request more details regarding asset ownership from wealthy individuals or family members, since many of them opt to keep these information to themselves. Family offices have to device strategies to address these requests from financial entities for purposes of transparency, at the same time guarding their privacy.

The Anti-Spinning Regulation

This rule aims to prevent brokers from allowing new investments to fall into the wrong hands

Rule 5131 of the Financial Industry Regulatory Authority (FINRA), commonly referred to as the ‘anti-spinning’ rule, obligates regulated brokers in the US to study investment accounts to determine whether the account owners are capable of making new investments. This rule aims to prevent brokers from allowing new investments to fall into the wrong hands; those with the capacity to involve FINRA member or affiliates to provide services in investment banking. It also prevents regulated brokers from allocating new issues to accounts of public companies whose directors, or any person supported directly by them, have absolute interest during the period in which they make use of investment banking services as FINRA members. This rule affects most family offices because its members are supported financially by a director or executive director of a large private or public company. Also, due to profitability or financial holdings, most single family offices are non-public covered companies.

Regulation on Reporting Beneficial Ownership

Wealthy individuals and family offices can lose their privacy in terms of the value and identity of securities

There are certain regulations for wide reporting by those who beneficially hold or exercise investment decisions over considerable amounts of publicly-traded securities. Often, such disclosures are available publicly, and should include details on direct security holders as well as those holder’s indirect and direct owners. This discloses a family structure and the different levels of ownership. Due to these rules, wealthy individuals and family offices can lose their privacy in terms of the value and identity of securities, as well as the multilevel structure that hold these securities intact.

Conclusion With the exception of the Dodd-Frank Act, these regulations affect both single family and multi-family offices. However, a single family office has still to meet the exemption criteria laid out in the Dodd Frank Act to qualify for exemption from SEC oversight.

]]>http://accreditedinvestornews.com/will-new-guidelines-bolster-family-offices-or-become-their-kryptonite-by-david-drake/feed/0SEC Catapults Obama’s JOBS Act and Enables SMEs and Startups to Raise $50 Million through Regulation A+http://accreditedinvestornews.com/sec-catapults-obamas-jobs-act-enables-smes-startups-raise-50-million-regulation-by-david-drake/ http://accreditedinvestornews.com/sec-catapults-obamas-jobs-act-enables-smes-startups-raise-50-million-regulation-by-david-drake/#commentsSat, 28 Mar 2015 04:40:16 +0000http://accreditedinvestornews.com/?p=14878By David Drake In a bombshell announcement, the SEC has just released the final form of Regulation A+ rules relating to Title IV of the JOBS Act, under which it has priority over state regulation for Regulation A offerings up to $50 million and stipulates co-ordinated reviews for offerings up to $20 million. Companies ...

In a bombshell announcement, the SEC has just released the final form of Regulation A+ rules relating to Title IV of the JOBS Act, under which it has priority over state regulation for Regulation A offerings up to $50 million and stipulates co-ordinated reviews for offerings up to $20 million. Companies on a fast growth trajectory will soon have the ability to raise up to $50 million by directly approaching unaccredited investors much like an IPO, providing a potent alternative to sources of institutional financing such as venture capital.

Many people were convinced that Title IV was the most potent game changer in the JOBS Act but had serious concerns about the expense and complications of State securities law which would require securities to be registered in every state in which they are sold. However, in their draft release of the proposed rules in December 2013, the SEC cleverly used a loophole to get around State securities law. In this final version, the SEC has settled the problem with a compromise which continues the pre-emption for Tier II offerings up to $50M while simultaneously enhancing Tier I offerings from $5M to $20M and thus provides a chance for “coordinated review” to prove that it works.

In arriving at this compromise, the SEC has pointed out that because the coordinated review concept is new and has to be tested, some form of pre-emption is necessary until this process has been proven. However, coordinated review has a great deal of promise provided that states can get their act together and make it work. However, it should be noted that states will keep complete jurisdiction in addressing all issues relating to enforcement and anti-fraud.

Photo Credit: VictoriaGlobal.co

Main Points of the New Regulations

Maximum high enhancements: Issuers can raise up to a maximum of $50 million in a period of 12 months for Tier II offerings and a maximum of $20 million for Tier I offerings.

Investors and limits in investment: Investment is no longer restricted to accredited investors and anybody can invest. However, individual investors using Tier II offerings are permitted to invest up to the greater of 10% of their net worth or 10% of net income per offering. There are no limits on investments for Tier I offerings.

Income/net worth eligible for self-certification: Unlike Rule 506(c) under Title II of the JOBS Act, investors will be permitted to certify their income or net worth themselves for application of the investment limits. Consequently there will be no irksome documentation or processes required to establish income or net worth.

Issuers can advertise offerings: There are no restrictions on solicitations in general which means that issuers are free to advertise their offerings on TV and on social media. However, Offering Circulars require the approval of the SEC prior to commencing sales so that issuers will have to file disclosure documents and audited financials to obtain this approval. This could possibly lead to a delay factor.

Audited financial and disclosure requirements: For Tier II offerings, along with the Offering Circular, the issuer will need to submit audited financial statements for two years while Tier I offerings require only submission of reviewed financials which need not be audited. There is a provision for issuers to “test the waters” to gauge investor interest in the proposed offering before committing the resources and time required to prepare the Offering Circular. Potential investors can express their interest but cannot actually invest.

As for disclosure requirements, issuers of Tier II offerings will have to file annual disclosure filings, semi-annual reports and current reports as well as audited financials. These disclosures can be discontinued after the expiry of the first year is the number of shareholders drops to below 300. There are no continuing requirements for issuers of Tier I offerings.

Pre-emption of state law: The old Regulation A (now Tier I) was not practicable for use because the securities had to be registered in every state in which the sales offering was made. The new regulations are a major step forward in making life easier (and less expensive) for issuers.

Other highlights: It would appear that Section 12(g) shareholder limits (2,000 persons and 500 non-accredited investors) will not apply to Regulation A offerings under certain conditions which would fix the major problem of limiting very small investments for example $100.

The securities will be freely transferable and unrestricted and this could lead the way to secondary trading on Venture Exchanges.

Regulation A+ is likely go into effect 60 days after publication in the Federal Register expected in June 2015. Once these regulations go into effect, entrepreneurs will be presented with the opportunity to raise millions of dollars simply and affordably from crowdfunding which will provide a major boost to the crowdfunding industry as a whole.

What the Experts Predicted

Scott Purcell, CEO of FundAmerica, a co-founder of one of the leading crowdfunding organisations and a leading advocate of crowdfunding for equity, had this to say when asked some time ago about what would happen if crowdfunding for equity in the USA became legal: “It will change the world. Yes, literally. Crowdfunding for securities (debt will be MUCH larger than equity) will enable millions of businesses to get the capital they desperately need to grow and create jobs. This will usher in a boom period the likes of which this country, and the world, has never seen.”

Similarly, legal expert Scott Andersen of consultDA (with 20 years experience as a prosecutor with the Financial Industry Regulatory Authority (FINRA), NYSE Regulation, Inc and New York State Attorney General) had earlier made the following comment:

“Congress, by allowing general solicitation and advertising in the capital formation process, opens broad possibilities for entrepreneurs and new and seamless investment opportunities for the public.”

¹IN FULL DISCLOSURE, SCOTT ANDERSEN AND I RECENTLY FORMED AND ARE PARTNERS IN A SECURITIES COMPLIANCE CONSULTANCY FOR BROKER-DEALERS, INVESTMENT ADVISERS AND OTHER FINANCIAL INSTITUTIONS: CONSULTDA.COM.

David Drake is an early-stage equity expert based in New York City. He is the founder and chairman of Victoria Global Corporate Communications; LDJ Capital, a family office and private equity advisory firm; and, The Soho Loft Media Group, a global financial media company with divisions in Publications and Conferences. He is also a Partner at ConsultDA. You can reach him directly at David@LDJCapital.com.

]]>http://accreditedinvestornews.com/sec-catapults-obamas-jobs-act-enables-smes-startups-raise-50-million-regulation-by-david-drake/feed/0What Last Month’s SEC Ruling Means for Investorshttp://accreditedinvestornews.com/what-last-months-sec-ruling-means-for-investors/ http://accreditedinvestornews.com/what-last-months-sec-ruling-means-for-investors/#commentsSun, 25 Aug 2013 19:56:57 +0000http://accreditedinvestornews.com/?p=1600Less than a month ago, the Securities and Exchange Commission lifted the advertising ban on private investments, which means that hedge funds can now promote their products to the general public. Let’s take a closer look at the SEC’s new ruling. The New Ruling According to the new SEC ruling statement that was issued on ...

]]>Less than a month ago, the Securities and Exchange Commission lifted the advertising ban on private investments, which means that hedge funds can now promote their products to the general public. Let’s take a closer look at the SEC’s new ruling.

The New Ruling

According to the new SEC ruling statement that was issued on July 10, there is no longer any ban whatsoever on general solicitation and advertising on private placements. This means that, for hedge fund managers, a wealth of new opportunities has opened up – as well as new challenges. Marketing flexibility has now been expanded for managers of private hedge funds.

Is It Good News?

As of May of this year, broker-dealers are now required to file new reports with the SEC, ultimately meaning that there will be much more compliance with the Commission’s pre-established financial responsibility rules. These rules are designed to increase protections for individual investors who are turning their own money and assets over to broker-dealers registered with the SEC, as well as those investing in alternative assets. But what does the July ruling mean?

According to Senator Carl Levin (D) of Michigan, the ruling is not good news for investors. He feels that it is as though investor protections have gone out the window all over again, saying that the new rule will damage the confidence investors have in U.S. markets, as well as the overall investing public. However, proponents of the ruling argue differently. They believe that July’s ruling is a great supplement to what happened in May,

Accredited Investors and the SEC’s Ruling

Those in favor of the new rule argue, on the other hand, that there are enough limits on who is able to invest in these new private offerings. This is where accredited investors come in – people who are investing in alternative assets and have a net worth of at least $1 million.

According to the regulation, the company or fund raising money must have a basis within reason to conclude that the investor is qualified for accreditation, including reviews of tax returns; as such, proponents of the SEC’s new ruling believe that there are plenty of safeguards available to verify that investors are, in fact, accredited.

The ban on advertising is set to end next month. After the waiting period is officially over, the new rule will mean that hedge funds and companies that use general advertising will be required to notify the SEC at least 15 days before they begin their solicitation process. Even so, even SEC commissioners who are in favor of the new ruling believe that advertising agencies must continue to monitor the more relaxed regulations to see if they are putting investors at risk, even those investing in alternative assets.